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· New Zealand dairy farmers improve efficiency, cut breakeven costs to $5.05 per kg of milk solids from $5.25 last season and $5.77 the prior year

Class III, Cheese & Whey

Class III and cheese futures snoozed through the first session of August as contracts traded mixed on light volume with traders very hesitant to commit to direction in light of the unchanged spot call. Granted, a lone bidder showed up in the barrel market but you could’ve heard a pin drop for the balance of the session. At this juncture, the futures feel heavy but can’t really break lower or advance to the upside until spot moves, so for the time being, direction is being held hostage by cash.

We continue to hear chatter of barrel tightness however in taking a look back at July’s activity, a respectable 69 loads changed hands, which was 23 more than the previous month! That doesn’t reflect tightness and as far as the demand side of the equation is concerned from the restaurant sector, commercial disappearance from USDA is virtually unchanged amidst a weakening Restaurant Performance Index, which declined for a second consecutive month to 100.3.

With futures continuing to sit at or near 2016 highs, we have to wonder how sustainable the current situation is. Product appears to be available, futures are overbought and if the grain markets are any indicator as to where this thing might be headed—look out below. Dairy did lag the grain markets on their move to the upside a few months back and dairy is lagging on the way back down as well, with the main question being what will be the trigger for convergence. For the time being, futures are content to rest on short term technical support levels and will take a look at this morning’s GDT auction as well, but it’ll most likely be spot direction that dictates movement moving forward.

Cooperatives Working Together (CWT) has accepted seven requests for export assistance to sell 174,165 pounds (79 metric tons) of Cheddar cheese, 3.417 million pounds (1550 metric tons) of butter and 88,185 pounds (40 metric tons) of whole milk powder to customers in Asia, Central America, the Middle East, North Africa and Oceania. The product has been contracted for delivery in the period from August through November 2016.

We look for Class III, Cheese and Dry Whey to open steady/mixed.

Class IV, NFDM & Butter

​Butter futures bounced off of long term technical support at its 150 day moving average (purple line on chart below) and ripped back to the upside courtesy of the spot market tacking on 1 ½ cents to $2.15. It’s as if the market is convinced a trip north of $2.25 will follow directly on the heels because futures posted limit higher settlements from September-November and gains through Q1 on moderate volume. Another push to the upside will have traders eyeing down the 50 day moving average (red line) and ideas of a possible V-shaped recovery with a maybe even a visit back near the July highs. With the market oversold to finish last week, it really opened the door to what we saw yesterday, especially in light of the underlying support at the aforementioned moving averages.

October Butter—Daily

NFDM futures started the month on mixed ground as 2016 contracts were pressured lower while deferred contracts out in 2017 saw support. The trade seems well balanced for the time being with the spot price continuing to oscillate in the mid $0.80’s and while there have been attempts to muscle up through the $0.90 level, they have all been met with willing sellers, which will keep a lid on things until that changes. This morning’s GDT auction will help to shed some light on price from an international standpoint, however we would expect the current domestic dynamic to trump that outcome barring an unforeseen aggressive price movement.

We expect NFDM, butter & class IV to open firm in anticipation of a stronger GDT auction.

Grains

The bears had an axe to grind in the grain markets as fund managers continue to bail on long positions and add to short ones. By yesterday’s closing bell, beans were down close to 40 cents, corn shed 8 cents while wheat lost 4 in what is shaping up to be an increasingly bearish landscape with weather forecasts looking favorable for the next couple of weeks and impressive crop ratings rolling in. With the bulk of the corn crop progressing past the critical pollination stage without much of a hiccup, the attention remains on the beans, which need to get through the next month or so without enduring any sustained heat events. Yesterday's action tells you there's not much fear of that happening and there remains quite a bit of downside risk for beans as fund managers were not nearly as aggressive sellers as the trade had anticipated based on the latest CFTC report released last Friday.

We look for corn and wheat to open slightly higher, soybeans slightly lower.

UK and Polish milk collections for June

Eurostat data released this morning showed UK milk collections in June totalled 1.22 million tonnes, down 9% on June 2015 production and 4.4% behind the three year average for June. The latest data put cumulative collections for the calendar year to the end of June at 7.60 million tonnes, 2% behind the same point last year. Yesterday we reported on AHDB data which showed UK collections were down 7.1% in June at 1.25 million tonnes however Eurostat’s data is showing a bigger drop in June collections.

Eurostat data released last night showed that after posting a record month for milk collections in May, Polish production eased back considerably in June. Collections in June totalled 951kt, a drop of 2.2% compared with June 2015 but 2.7% ahead of the three year average for June. The drop in production observed in June is all the more significant considering collections in May were 2.1% ahead of May 2015 collections. Cumulative Polish collections for the year to date (Jan to Jun) now total 5.65 million tonnes, an increase of 5.1% compare to the same period last year.

NZX Futures

A combined 840 lots/tonnes traded on NZX overnight with all lots trading over WMP. Aug16 traded 335 lots with the first 20 lots trading at $2,150, down $20 from its last traded of $2,170 from last Friday and the next 10 lots trading at $2,140. The next 150 lots traded at $2,165 while a further 150 lots traded at $2,170. The last five lots traded on the Aug16 contract traded at $2,165. Sept16 traded 180 lots, the first 80 traded at $2,320, down $20 from its last trade a day earlier and the remaining 100 lots traded at $2,300. Oct16 traded 25 lots at $2,385, up $75 from its last traded price from last Wednesday. Q1 2017 traded 100 lots per month. Jan17 traded its 100 lots at $2,525, up $45 from its last traded price on Monday. Feb17 traded the next 100 lots at $2,560, up $90 from its last traded price of $2,470 from last Wednesday while March traded the remaining 100 lots at $2,600, up $140 from its last traded price from July 22nd. With GDT set to take place today, we are forecasting the Index will be higher (up 2% to 4%) with WMP, SMP and AMF futures all considerably higher than since the last event two weeks ago.

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